Subject: ISO AMT Comment: PRESIDENT'S ADVISORY PANEL ON FEDERAL TAX REFORM Statement from Susan Schroeder Anderson Individual 657 Tami Way Mountain View, CA 94041 March 16, 2005 To the members of the President’s Advisory Panel on Federal Tax Reform: Thank you for taking the time to read this letter. I believe the Alternative Minimum Tax (AMT) and its treatment of pre-taxation on Incentive Stock Options is wrong. I feel that this tax, which was originally created because 155 wealthy businessmen didn’t pay any taxes, was not intended to financially ruin the middle class worker. It is an unfair tax and should be abolished immediately. This tax has caused our family undue stress and anguish. Here is my story: In 1995 I joined a start-up high tech company called VeriSign. I was hired as an Executive Assistant to the President and my salary was $45,000. Over the years, I was granted Incentive Stock Options (ISO). I tried to regularly exercise and hold my ISOs for one year in order to pay long-term capital gains on the stock. In July 2000, I decided to leave my job so that I could plan my wedding and also start to plan a family. I had stock that needed to be purchased when I quit my job in July of 2000, so I exercised the stock. As everyone knows, the stock market then suffered the worst stock market downturn in history! At the time, I did not sell my stock in hopes that the market may recover. Had I known about the AMT, I would have sold the stock immediately. I come from a middle class background; my father worked for AAFES (Army & AirForce Exchange Service) and my mother was a nurse. I could not go to my parents for advice regarding my stock options because they had no experience with stock. I tried to get a financial advisor but had a difficult time finding one since, at the time, here in the Silicon Valley, financial advisors would only take people with large portfolios. My only financial advisor was the broker that I used through VeriSign, who was biased since they worked for VeriSign – they suggested I hold my stock. Many people had similar situations to mine. My tax preparer told me that I would be subject to the Alternative Minimum Tax and that I could receive a tax credit and I could use that to offset a sale later on. Unfortunately, my tax preparer wasn’t aware that I would only be able to recover $3000 per year in my AMT tax credit. At the time, most tax preparers hadn’t had much experience with AMT and therefore, could not give any detailed advice on how to handle the stock. At that time, my salary for 2000 was $50,747 and my taxes paid to AMT were $408,627 – over 8 times my annual salary on money that I did not have nor received!! I had to take all the stock and sell it and take a loan in order to pay my taxes. On top of that, I had to pay lawyers and accounts in excess of $20,000 to help me to understand AMT and to try to fix this problem. The amount of stress was and is still unbelievable. I never received any benefit from my ISOs – in fact, I now have a tax credit that I will never be able to use in my lifetime. Since AMT is also a self-reported tax, I have many sleepless nights thinking about how I shouldn’t have reported the stock to the IRS, how it doesn’t pay to be honest, etc. I personally know many people did not report this tax because they felt that the chances of being audited were very slim. At the time, I did consider this but having spent my entire life working and paying taxes, I knew in my heart that I was not the kind of person to lie to the government. AMT was never intended to trap the little guy. It was originally intended to make sure the very rich, who years ago had tons of loopholes to hide their money, would pay taxes. This law is flawed on so many levels: 1. It’s self-reported, the IRS has no way to track who reports and who doesn’t; 2. You are pre-taxed on gains that have never been realized; 3. After paying AMT, you are given a tax credits that never gains any interest (on the flip side, if we owe the IRS money, we have to pay interest plus penalties); 4. The AMT tax credits will never be fully used – mine is $408,627 and it would take me 136 years to use this credit. The mental anguish over this tax is unbelievable. I know that many people think that those of us who were caught in the AMT ISO trap were greedy but that isn’t the case. I personally feel that my lack of understanding ISOs and the stock market along with the confusing way that AMT is calculated helped to get me in this AMT mess. I just didn’t have the knowledge to fully understand the ramifications of this law. Those of us who found out the hard way had to make a decision, either report it or not – many did not. I chose to report the tax even though I felt it unjust and unfair. However, my honesty only got me a huge AMT bill while others walked away and didn’t report their AMT. Those who didn’t report, wait for the statute of limitations to go by and then breathe a huge sigh of relief when they find they haven’t been audited. The IRS has no way of tracking stock sales and exercises and they rely solely on the taxpayer to supply this information – this seems awfully stupid to me as it can lead to under reporting, etc. of this and other taxes. I am working with a law firm to try to recover some of the AMT that I’ve paid. My amended returns have been with the IRS for over two years. The IRS holds amended returns “hostage” so they can sit out the statute of limitations instead of making decisions regarding our arguments for getting credits back faster. I believe they do this because they are afraid to do the “right” thing and call this law unfair. The IRS refuses to respond to my amended returns. The only recourse that I have is to take the IRS to court – which means spending another $15,000-25,000 of money that I don’t have – and then knowing that the courts don’t want to make the “fair” decision but want to make the “constitutional” decision (following the law). If I did go to court – I could be tied up in court for another 5 years. The only way to get justice is for the law to actually change. I hope that my letter puts a “face” on what this horrible law has done to the average person. I am not an executive, I am not a founder of a company, I ended my career at VeriSign as a Project Manager – nothing fancy. If you saw my tax returns for the last 10 years – you would see that I never made over $75,000 a year in actual salary. I always paid my taxes on time. I’m a responsible, citizen who has voted in every election since I turned 18. I believe that my government will do the right thing. However, in the future, I would never accept stock in lieu of salary like I did at VeriSign. I don’t ever want to be in a position of having to make decisions that will ruin my financial life and the life of my family. I hope and pray that the President’s Advisory Panel on Federal Tax Reform will have the courage to listen to all the comments from people like myself and make some real changes in this law. We did what we thought was right, we reported our stock exercises and then ended up paying millions of dollars in pre-tax to the government on stock that we never saw any financial gain. It’s wrong. Plain and simple. If it happened to you or to one of your family members – you would be outraged. Time is running out for those of us who couldn’t pay their AMT – if the Tax Panel does nothing – many will loose everything they ever worked for – their savings, 401Ks, their children’s education funds, their homes. Please do something about this before these honest citizens end up homeless. Sincerely, Susan Schroeder Anderson |